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AI optimism has prompted the S&P 500 to record prices, exceeding the point-COM level.
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Overestimation reflects expectations for AI-driven revenue.
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Although the level of ratios is turning, it does not necessarily have to be in stock in the bubble.
The stock market bull convinced the power of AI to change the economy often compared with Dot-Com Bubble a quarter of a century ago. Unlike the early days of the Internet boom, real profits have emerged – so yes This time the idea is different.
But, Bank of America strategist Michael Hartnett recently sent a message to these investors: “It’s better this time.”
Concerns about the potential AI bubble have been tricky since Hartnett’s original comment in mid-August. As the stock market wins a series of new record highs, this is driven by optimism around the expected Fed rate reduction.
Hartnett, who has frequently expressed suspicion of the market bull run over the past few years, shared an incredible chart highlighting the level of optimism among investors about the impact of AI. It shows the price ratio of the S&P 500, which measures the total market value of the index components compared to its total assets minus liabilities.
As of August, the record-breaking height of valuation measures was 5.3, high at the 5.1 level in March 2000, at the peak of the Internet bubble.
Other classic valuation measures show market bubbles relative to history. For example, Hartnett also shared a chart showing the 12-month-forward price ratio for the S&P 500 years. Except in August 2020, it is the highest level since the dot-com era.
and the cycle-adjusted price-to-value ratio, which measures the average of current prices to the 10-year average income, at a level similar to 1929, 2000, and 2021.
Overvaluation reflects high expectations for future returns. Sometimes these expectations get too high and the price is correct, but they don’t require bubble scenarios. So far, many AI companies have been continuously exceeding earnings expectations, which shows that optimism can justify.
Valuations also predict forecasts of average long-term earnings better than recent performance, and the perception of the market in the coming months differs on Wall Street. Despite prudent calls, many strategists continue to raise their year-end S&P 500 targets.
Earlier this week, BlackRock’s chief investment officer for global fixed income Rick Rieder said the market was in “the best investment environment ever” due to strong demand for stocks, imminent tax cuts, and recent productivity and earnings growth.
